Cafeteria Plans IRC Sec. 125
Also called flexible benefit plans, cafeteria plans allow participating employees to choose among two or more benefits consisting of cash and qualified benefits. See IRC Sec. 125 (d) (1) (B).
There is no need to change current benefit programs. If the employer is unable to pay for fringe benefits, the employee can enter into a salary-reduction agreement with the employer. The employer then uses these funds to pay for the employee's benefits. This allows the employee to pay for his or her own benefits with pre-tax dollars.
Employee BenefitsSome of the benefits that can be enjoyed by employees include the following.
Employer BenefitsSome of the benefits that can be enjoyed by employers include the following.
Qualified BenefitsQualified benefits may include:
Plan RequirementsThe plan must be written and include only employees. The plan should include the following items.
DiscriminationThe plan must be available to employees who qualify under a classification established by the employer and which the IRS determines as not discriminating in favor of highly compensated or key employees. One discrimination test that impacts greatly on smaller employers is the 25% rule. The benefits or amount deferred by the key employee group may not exceed 25% of the total amount deferred by all employees. If this rule is violated, the deferrals of the key employees are treated as taxable income defeating the purpose of the plan for them. There is no effect on rank and file workers. Key participants are any participants and participants' beneficiaries who, during the determination year (1)
1 - In-service distributions are subject to a five-year look-back period.
2 - This value applies to 2006.
3 - The family attribution rules of IRC Sec. 318 apply. Any participant is deemed to have the same ownership share as his or her spouse, children, parents and grandparents.